Question: My mother is a 75-year old widow. She owns her home free and clear and it is worth approximately $310,000. Her income from retirement pensions is $22,000 a year. She had a heart attack several years ago and suffers from high blood pressure and diabetes.

She would like to move to be closer to her family, especially her grandchildren. We suggested that she sell her house, and rent an apartment. However, the thought of renting is not acceptable to her.

What tax consequences would she have to face if she sold her house? If she does not purchase another house, can she put the sales proceeds into a money market fund? Do you have any advice on whether to rent or buy?

Answer: Unless your mother is not able to make decisions on her own -- which apparently does not appear to be the case -- the ultimate decision is hers to make. Many senior citizens do not want to live in an apartment -- or in a senior citizen home -- and would prefer to live in their own home. If her desires are not met, this could cause depression and anxiety, which obviously is not in your mother's best interest.

Let's first look at the tax consequences when she sells her current home. In order to determine the profit (called capital gain), we first have to determine the tax basis of the property. Let us assume that your mother and father bought it many years ago for $30,000. Let us further assume that when your father died, the house was appraised at $100,000.

Your mother's initial basis was $15,000 (half of the initial purchase price). When your father died, your mother received what is known as the "stepped up" basis in the property. This is based on the appraised value of the house when he died. In our example, since the house was worth $100,000 at the time of his death, your mother basis was increased by $50,000 (half of the appraised value). Thus, your mother's tax basis currently is $65,000 ($15,000 plus $50,000). For purposes of this illustration, we will assume that no major improvements were made to the house. However, if there were improvements, that would be added to basis.

If your mother sells the house for $310,000, her gross profit would be $245,000 ($310,000 minus $65,000). She would also be entitled to deduct any fix-up costs, closing expenses and real estate commissions in order to determine her net capital gain.

But even without these additional expenses, since your mother has owned and lived in the house for many years, she can exclude up to $250,000 of gain. In other words, she will not have to pay any tax whatsoever when her house is sold.

There are absolutely no restrictions on how or where the sales proceeds can be used. The money belongs to your mother, and she is free to use it as she pleases. Even though it may be foolish to you, she can even squander the money or give it away.

She can also give gifts to her family. Currently, she can give up to $11,000 to anyone, and these gifts will have no tax consequences for either the gift giver or its recipient.

Should your mother rent or buy? This is a very personal question, which can only be answered by the individual herself. However, here are some suggestions which may assist your mother in her decision making:

• How financially sound is she? Have she saved enough money for that rainy day? Is her health insurance policy adequate, even in case of a catastrophic illness? Can she afford the annual real estate taxes and insurance premiums? In other words, if she buys a house, will she be "house rich and cash poor"?

• Is she physically able to handle living in her own house? Who will cut the grass and shovel the snow? Will she have to use stairs to get up to the bedroom or down to the basement?

• What kind of property are you looking at: a single family home, a condominium or cooperative unit, or a garden-type property in a homeowner association? Before you sign a sales contract, you should explore all avenues of property ownership.

And while you are shopping around, here is one other suggestion. Can you afford to buy a house (or a condominium unit) for your mother? She can pay you a nominal monthly rent, and you will have some tax benefits. But more importantly, your mother may not object to renting if her family is the landlord, instead of some stranger.